The foreign exchange market, or forex market, is a decentralized global market where currencies are traded. It is the largest and most liquid market in the world, with an average daily trading volume of $6.6 trillion. Forex rates, also known as exchange rates, play a crucial role in determining the value of one currency relative to another. These rates are influenced by a variety of factors, including political and economic factors.
Pakistan, like any other country, is not immune to the impact of political and economic factors on forex rates. In fact, these factors have a significant influence on the value of the Pakistani rupee (PKR) against other major currencies such as the US dollar (USD) and the Euro (EUR).
Political stability is a key determinant of forex rates. In Pakistan, political uncertainty can lead to a depreciation of the PKR. When there is political instability, foreign investors may become hesitant to invest in the country, leading to a decrease in foreign direct investment (FDI). This, in turn, puts pressure on the PKR, causing it to weaken against other currencies.
For example, in 2018, Pakistan experienced a period of political uncertainty during the general elections. The stock market plummeted, and the PKR depreciated significantly against the USD. This depreciation was a result of investors’ concerns about the future economic policies of the newly elected government.
Economic factors also have a profound impact on forex rates in Pakistan. One of the most crucial economic indicators that affect forex rates is the interest rate. When the central bank of a country raises interest rates, it attracts foreign investors who seek higher returns on their investments. This increased demand for the currency strengthens its value.
Conversely, when the central bank lowers interest rates, it discourages foreign investors, leading to a decrease in demand for the currency and a depreciation in its value. In Pakistan, the State Bank of Pakistan (SBP) is responsible for setting interest rates. Changes in the SBP’s monetary policy have a direct impact on forex rates.
Inflation is another economic factor that influences forex rates. When a country experiences high inflation, the purchasing power of its currency decreases. This depreciation in the currency’s value leads to a higher forex rate. In Pakistan, inflation has been a persistent challenge in recent years. High inflation rates have put pressure on the PKR, causing it to weaken against major currencies.
Furthermore, economic indicators such as GDP growth, trade balance, and current account balance also affect forex rates. A strong GDP growth rate indicates a healthy economy, attracting foreign investors and strengthening the currency. Conversely, a trade deficit or a negative current account balance can put pressure on the currency, leading to a depreciation.
The COVID-19 pandemic has also had a significant impact on forex rates in Pakistan. The global economic slowdown caused by the pandemic has led to a decrease in remittances from overseas Pakistanis. Remittances are a significant source of foreign exchange inflows for Pakistan. The decline in remittances has put pressure on the PKR, causing it to depreciate against major currencies.
In response to the economic challenges posed by the pandemic, the SBP has implemented various measures to stabilize forex rates. These measures include interventions in the foreign exchange market and the introduction of temporary import restrictions to conserve foreign exchange reserves.
In conclusion, political and economic factors play a crucial role in determining forex rates in Pakistan. Political stability, interest rates, inflation, and economic indicators such as GDP growth and trade balance all influence the value of the PKR against other major currencies. The COVID-19 pandemic has further exacerbated the challenges faced by the Pakistani economy, putting pressure on forex rates. Understanding these factors is essential for forex traders and investors operating in the Pakistani market.
